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December 14, 2015 12:00 AM

Taxing teachers

Ironically, teachers could bear the brunt of a tax on stock trades

Bill Harts
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    Bill Harts is CEO of Modern Markets Initiative, a New York-based advocacy group representing electronic traders focused on high-frequency trading.

    Campaign season is a time when candidates seek to find their base through ambitious campaign promises. Usually, these are heavy on ideology, light on details and meet with mixed success and compromise when a candidate is actually elected. But promises are important in defining a campaign and often it's bigger is better. In the current campaign there is perhaps none bigger than Sen. Bernie Sanders' promise of free college tuition for all paid by Wall Street speculators. It seems a noble and simple proposal until you realize Wall Street speculators includes anyone with retirement assets in the stock market. That includes a lot of groups, perhaps few more prominent in size and savings than teachers.

    Of course there are many different investors that would be affected by the Sanders plan for a 0.5% tax on the value of every stock trade in America. But the irony is that collectively, teachers have some really big retirement funds that would pay some really big taxes under this plan. In fact, TeacherPensions.org, a project of Bellwether Education Partners, points out that at more than 3 million, teachers are the largest class of U.S. workers with a bachelor's degree or higher. That's a tax base with lot of earning potential.

    Recently, the California State Teachers' Retirement System announced it would hedge market downturns by reallocating more than $20 billion of the equity investments in its $188 billion portfolio. If Mr. Sanders' tax of 0.5% of the value of the trade were in place, such a portfolio realignment would cost hard-working California teachers more than $100 million in taxes. That's money that would have stayed in the pension fund and had the potential to compound in value and further grow the asset pool.

    And at 0.5%, the tax is not tiny. Consider this: The Investment Company Institute reported in its 2015 fact book the “average expense ratio for equity funds fell from 99 basis points. (0.99%) in 2000 to 70 basis points (0.7%) in 2014.” This tax is more than 1.5 times larger than the 0.29% in expense reduction the mutual fund industry has taken 14 years to realize. And for those who think in terms of per-share amounts, investors will have to pay about 42 cents a share to buy or sell the average share in the S&P 500 index.

    Virtually all of our nation's union members depend on pensions they spent a lifetime accruing to comfortably provide for them in retirement. And every basis point of expense, over time, serves to eat away at gains. The government realizes the diminishing effect of taxes on assets, that's why money saved for retirement can be tax-deferred.

    It is interesting that unions dominate Mr. Sanders' top donors list even though his tax proposal would directly hit the pensions of the Teamsters, machinists, auto workers, steelworkers and, yes, teachers, who are supporting him.

    Getting a tax instituted can be a very insidious process. It is usually sold as targeting deep pockets and affecting “other people.” But it is only after a tax is implemented that people realize the burden is actually on them. Mr. Sanders says his tax is going after rich “Wall Street speculators.” The fact is, a tax on every stock transaction is a tax on every investor. But, of course, that's not a very inspirational message.

    Bill Harts is CEO of Modern Markets Initiative, a New York-based advocacy group representing electronic traders focused on high-frequency trading.

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